CHAPTER 1

1. INTRODUCTION:

The growing role of market in the world, i.e. market –oriented economy in the later part of

the 20th century has led to the spread of capitalism, globalization, liberalization,

privatization, demanding efficiency, corporate culture, model code of conduct and business

ethics for the very survival of the corporate world. The concept of corporate governance

emerged in the late 1980’s when several companies collapsed in U.K. because of inadequacy

of operating control. This led to the setting up of “Cadbury Committee” on corporate

governance in 1991 by the London Stock Exchange. Further a numbers of scams and frauds

that have surfaced during the last three decades have also shocked the confidence of the

investors. In this research, an attempt has also been made to discuss the famous scams in

addition to corporate governance. India is a traditional country having historical background

going way back to many centuries. It has its own culture and value system. It has its own

legends and similarly own management practices. Indian economy is very old and its crafts

and artistic products were well known world over. It is a fact that before the British ruled in

India, India was well known exporter of many goods to other countries and always had a

favourable balance of payment. The present day corporate sector in India is governed by the

Companies Act and many other regulations passed from time to time. But, the Indian

Management practices and corporate governance is a blend of provisions provided by

various laws, government directives and Indian social and marketing traditions. Most of the

books and thesis directly deals with the concept of corporate governance without thinking

that to understand the provisions of Companies Act related with corporate governance and

corporate social responsibility, one needs to analyse first the provisions of Companies Act
related with corporate governance and corporate social responsibility. Most of the Indian

companies have the family members on the board of directors. Although the companies use

public money in the form of share capital but most of directors belong to the same family.

They control all the decision making processes and the small investors have no role to play

in decision making and control. This is because the majority of the investors in India are

small-scale investors. However, the amendments in the Companies Act, 2000 has tried to

plug the lacuna by inserting a provision for appointment of a representative director for

small scale investors. Through this thesis, the researcher has tried to interpret technical

provisions into simple language which can be understood even by laymen. Corporate

governance is considered as a system by which companies are directed and controlled. It is a

set of standards which aims to improve the company’s image, efficiency, effectiveness and

social responsibility. Sustainability ensures the long-term financial and economic viability of

corporate investments and of requiring compliance with minimum environment viability

and social standards. In this study, the researcher has critically analysed the concept of

corporate governance and corporate social responsibility and the relationship between

them. The issue of corporate social responsibility is an integral part of corporate strategy,

planning and operational performance. Profitability should not be the sole criteria of vision

and vital factor in judging the company’s performance but corporate should also focus on

their responsibility towards society at large. Corporate social responsibility is the

commitment of business to contribute to sustainable economic development, working with

employees, their families, the local community and society at large to improve their quality

of life. It covers a variety of sensitive issues such as human rights, worker’s rights, supplier’s

relations and involvement. In the fast changing business environment when companies are

driven by market forces and competitive pressures, they are judged by markets primarily by
the financial indicators, namely, profits, earnings per share, etc. Board members receive

incentives based on these performance indicators. If, socially responsible behaviour does

not reflect into a company share price or its profits, companies would not have the

inclination and incentive to pursue socially responsible polices.

1.2 RESEARCH METHODOLOGY:

The Methodology followed in this dissertation is Doctrinal research in law. In case of

doctrinal research the sources of data are legal and appellate court decisions whereas in the

other case the sources of data are less and mostly new techniques have to be used.

Doctrinal research is not concerned with people but documents whereas in case of non

doctrinal more importance is given to the society and people. The scope of doctrinal

research is narrower as compared to non doctrinal since it studies about what the doctrine

or the authority says yet more encouragement is given to doctrinal type of research than

the non doctrinal. There is no requirement of imparting training for collection and use of

sources whereas training is needed to use new techniques in the non doctrinal research. In

case of doctrinal field work is not needed library is sufficient whereas in non doctrinal

research the field work is most important thing.

1.3 OBJECTIVES OF THE STUDY:

1. To understand the concept of Corporate governance

2. To document the corporate governance practices in various groups of industry

3. To examine the practice of the corporate governance for Board of Director

4. To study the transparency and related disclosure

5. To study shareholder's satisfaction and practice for their various claim

 6. To analyse the disclosure of financial information

7. To document the level of corporate social responsibility.

1.4 SCOPE OF THE STUDY

The scope of the study is very wide. All units registered under the companies Act 1956 can

be the census for the study. However, the researcher has selected 5 groups. All these groups

are selected from the published issue of the Business ‘Today-November 2003’ titled “India's

top 500 companies”. Total 50 companies have been covered for the study.

1.5 SIGNIFICANCE OF THE STUDY

This study is important for the two major aspects. Firstly, it can give understanding of

practical approach or implementation overview. Secondly, it also gives comparative

overview of corporate governance provisions in Indian corporate sector. It is dynamic study

in nature. So the significance of the study is very high. Further, some observations may be

useful to academicians, industry people a policy maker.

1.6 RESEARCH QUESTIONS

1.7 PLAN OF STUDY

The present study is organized into 6 chapters.

Chapter 1 deals with INTRODUCTION.

Chapter 2 deals with

Chapter 3 deals with

Chapter 4 deals with

Chapter 5 deals with

Chapter 6 deals with CONCLUSION ANS SUGGESTIONS.

CHAPTER 2

2. OVERVIEW OF CORPORATE GOVERNANCE

“Changing economic scenario of Indian industries “is not a new phrase. Especially the post

independence regulations of Indian economy have led India towards developing country.

Post independence phase was relatively slow growth boosting phase. This was due to

excessive regulations put forth by government in form of license system, investment barrier

through MRTP Act, excessive reservation and dead investment in small scale and medium

scale projects, entry barriers in form of public sector reservation, export import barriers for

domestic and foreign companies. These factors had reduced the growth of Indian industrial

units. Announcement of the new industrial policy in the year 1991 has permitted new

entrepreneurs to race to the top of market capitalization through economic liberalization,

competitiveness, globalization and privatization.

The dominant characteristic of today’s top 50 companies is preponderance of first

generation enterprise of professionally run business. In 1991, 22 out of the top 50

companies were controlled by family groups that held their sway during the license –

control regime, By February 2000, the role were reversed; 35 were professionally managed,

of which 14 were first generation business; only 4 out of the 50 were run by older business

families. This change has argued well for corporate governance. The growth of economy is

also in account of foreign direct investors in the union ministry to budget of year 2002-2003

the proposals have been forwarded to the group of minister on FDI. The group of minister,

headed by Finance minister Jaswant Singh, will also consider proposals to raise the foreign
equity ceiling in basic telecom and mobile services from 49% to 74%, 100% Equity in

petroleum product marketing and in advertising.

This will make corporate sector to be perfect if they need foreign company to invest in their

business. As every investor prefers to invest in that company only, which are more

transparent in their operation.

The banking sector reforms and capital market uncertainties have led many investors to

think for investing in corporate sector with rational process.

2.1 MEANING OF THE TERM GOVERNANCE

“Governance” – according to dictionary is governing or to rule. This meaning has been

understood in common parlance. Let’s, take the meaning from broader aspect. Governance

is to control. Govern means direct and control and one can derive meaning as direction and

control of affairs as governance.

2.2 MEANING OF CORPORATE GOVERNANCE

Separation of management and ownership will depended for responsible management

philosophies attract long-term, stable, low-cost investment in capital. This is true whether

the firm is publicly traded, privately held, family-controlled or state-owned. It is only when

the managers of a firm themselves own the entire firm – and are committed to relying solely

on their own capital – those managers generally are free to apply corporate assets (as their

own private property) inefficiently or for non-productive uses.

The fundamental concern of corporate governance is to ensure the means by which a firm’s

managers are held accountable to capital providers for the use of assets. The responsibilities
and functions of the corporate board in both developed and developing nations are

receiving greater attention as a result of the increasing recognition that a firm’s corporate

governance affects both its economic performance and its ability to access patient, low-cost

capital. After all, the board of directors – or, in two-tier systems, the supervisory board – is

the corporate organ designed to hold managers accountable to capital providers for the use

of firm’s assets. The past five years has witnessed a proliferation of corporate governance

guidelines and codes of “best practice” designed to improve the ability of corporate

directors to hold management accountable.

This global movement to emphasize that boards have responsibilities separate and apart

from management – and to describe the practices that best enable directors to carry out

these responsibilities – is a manifestation of the importance now attributed to corporate

governance generally and, more particularly, to the role of the board.

Corporate governance has succeeded in attracting a good deal of public interest because if

its apparent importance for the economic health of corporations and society in general.. As

a result different people have come up with different definitions that basically reflect their

special interested in the field. It is hard to see that this disorder will be any different in the

future so the best way to define the concept is perhaps to list a few of the different

definitions rather than just mentioning one definition.

2.3 NEED FOR GOOD GOVERNANCE

“Governance” means that to rule or to command. But without basic reasons this is

worthless. A question may be raised in one’s mind that why there is a need for governance.

Good governance is important whether it is corporate environment or general society or

political environment. Good governance level can improve public faith confidence in

political environment.

When the resources are too limited to meet the minimum expectations of the people, it is

the good governance level that can help to promote welfare of the society. The way forward

to achieve the desired level in Indian scenario is to promote the social thinking in positive

perspective along with the perfect monitoring mechanism of regulation frame work. Now

question may arise that what can be good governance?

Following are the measures, which can be considered as measures or requirement for good

governance.

(1) SETTING INTERNAL CONTROL SYSTEM:

By setting internal control company can ensure efficient conduct of business control leads to

consciousness, which makes less possible chances of default.

(2) BUDGETARY CONTROL:

When any transaction has been put under budgetary boundaries it leads to ensure

accountability and transparency. Budget gives answers to many questions, what had done?

Why? And through which way? Thus it is base for planning and tool for control.

(3) FINANCIAL PLANNING & MANAGEMENT:

Scarcity of finance leads for crucial and critical management of financial resources, which

requires in depth financial planning. Financial planning is concerned with rational acquisition

and allotment of funds while financial management is concerned with optimum utilization

of funds.
(4) COMPLIANCE OF ACTS / REGULATIONS:

Best governance is governance that follows norms. Every firm should / must follow all the

related acts which are related with company’s transactions. Acts includes standardization

and norms that protects goodwill and resources.

(5) TAX PLANNING:

One or every firm has to plan in advance about all items of tax and how to pay it? They

have to concentrate that how company will go for paying tax so that as far as possible it can

take benefits. If tax is not paid in advance it leads to devaluation. Tax planning generates

more shareholders’ return.

(6) MANAGEMENT INFORMATION SYSTEM:

Information is blood of business world. Company has to be in constant touch with

environment through information. Management information system is channel of inter

related variables which has exact cause and effect relationship. It provides base for

communication. Company can maintain good governance through MIS. It can improve

performance which is base for C.G.

(7) COST CONTROL:

Cost is major aspect in profit. If cost is controlled it can stabilize or improve company’s

competitiveness. Every company needs to maintain its competitive value by controlling its

cost. Cost control is best tool for good governance.

Above mentioned tools can be considered as good governance practices.

3. CORPORATE GOVERNANCE HISTORY

Knowledge of the past can help to prevent firms and policy makers from repeating past

mistakes. History is also like examples of how to do things right. Corporate governance in

Britain and the United States in the seventeenth, eighteenth and nineteenth centuries was

far from perfect, yet it was also far from being completely flawed. Anglo American

corporate governance, therefore, offers both warning and lessons. In the eighteenth and

nineteenth centuries, Americans and Britain’s looked ask once at most forms of government

regulation of business. In 1889, for instance, a railroad investor argued that while

government regulation sounds well it was not a good idea to give power over private

businesses to “bare majority of unexpected and unconscientiously politicians.” The

influence of John Locke was still strong in the late nineteenth century, prompting many to

question on the efficacy of government and legislation is not to confiscate, but to protect

property. Nineteenth century investment gurus regularly enrolled the importance of good

corporate governance. For example, Robert Word, in his 1865 notes on joint stock

companies described the characteristics of a good investment. The issuing company, he

argued, should have “a good scheme, brought before the public at a seasonable time

enough capital and it must be managed well.” Robert urged investors not to be filled into

complacence due to the size or previous success of a company. The international

community has all along been supportive of good governance practices as evident from

various guidelines standards and codes issued by various international agencies. Corporate

governance is not a new invention but was inherent characteristic of all healthy

organizations even in the past. The prominence of the concept began with Cadbury
committee report after facing financial crisis due to business failures in UK. The

Recommendations of Cadbury Committee in 1992.

3.1 CADBURY COMMITTEE’S CODE OF BEST PRACTICE

Corporate governance practices and concept has been recently raised due to growing level

of fall outs in corporate sector leading to severe injury, not only to stake holder but to the

whole economy. The prominence of the concept begun with Cadbury committee in 1992 in

U. K

CODES:

(1) Board of Directors:

 The Board should meet regularly, retain full and effective control over the company

and monitor the executive management.

 There should be clearly accepted division of responsibilities, which will ensure

balance of power and authority.

 The board should include non-executive directors of sufficient caliber and number

for their view to carry significant weight in the board’s decisions.

 The board should have formal schedule of matters specifically represented to it for

decision to ensure that the direction and control of the company is firmly in its

hands.

 There should be agreed procedure for directors to take independent professional

advice, if necessary at Co.’s expense.

 All directors should have access to the advice and services of the company secretary,

who is responsible to the board for ensuring that board procedures are followed and
 that applicable rules and regulations are compiled with. Any question of the removal

of the company secretary should be a matter for the board as a whole.

(2) NON EXECUTIVE DIRECTORS:

 Non-executive directors should bring an independent judgment to be an issue

of strategy performance resources, including key appointments and standards of

conduct.

 The majority should be independent of management and free from any business

or other relationship, which could materially interfere with the exercise of their

independent judgment, apart from their fees, and shareholding fees should be

as per time spent in company.

 Non-executive directors should be selected through a formal process and both

this process and then appointment should be a matter for the boardl as a whole.

EXECUTIVE DIRECTORS:

 Director’s service contracts should not exceed three years without shareholders’

approval.

 There should be full and clear decisions of directors’ total remuneration and those of

the chairman and highest paid director.

 Executive directors’ pay should be subject to the recommendations of a

remuneration committee made up of wholly or mainly of non executive directors.

(3) REPORTING AND CONTROL:

 It is board’s duty to present a balanced and understandable assessment of the

company’s position.
  The board should ensure that an objective of professional relationship is maintained

with the auditors.

 The board should establish an audit committee of at least 3 nonexecutive directors

with written terms of reference, which deal clearly with its authority & duties.

 The directors should explain their responsibility for preparing the accounts next to a

statement by the auditors about them reporting responsibilities.

 The directors should report on the effectiveness of the Co.’s system of internal

control.

The green bury Committee in 1995, have been assumed into a combined code owing its

genesis to the Hamper Committee and became the past of London stock exchange

guidelines. While the emphasis in the Cadbury Committee report was on Audit Committee,

Remuneration Committee, Director’s Training, Standards of conduct, Executive Directors on

the board, Financial Reporting, Pension Governance etc., the Green bury Committee

recommendations, among others also include interim reporting, Director’s responsibility

statement, compliance certification, voting by institutional investors etc. Most of the

provisions owe their relationship with one or the other accounting functions. The position

under various studies made in India was also not much different than what was in UK,

irrespective of the fact that the conditions prevailing in India were much different than

those in UK, particularly in the context of capital market, share holding patterns etc. In India,

separate codes for corporate Governance were issued by the trade and industry

associations some where in 1997 and committee constituted by the SEBI in the year 1999.

The recommendations as made and industry association included the recommendations for

management and supervisory categories of board, consolidations accounts, limited

directorship to increase accountability and efficiency etc. The SEBI code in fact was later on

given a legal shape by inclusion of clause 49 of the listing agreement. The other measures

taken by the SEBI include guidelines for investor’s protection, introduction of takeover code,

recommendations for amendments in security laws etc. Thus ultimately, the via media

adopted for implementation of C. G. is through enforcing new provisions in various laws. In

fact if professionals increase their supposed role then C.G. level would automatically

increase. In present scenario in spite of lot of measures taken in C.G. public confidence is

still lacking.

The concentration therefore may also be on:

(a) Approximate policy framework.

(b) Investor’s education.

(c) Entrepreneurial education.

(d) Effective monitoring.

3.2 CORPORATE GOVERNANCE IN INDIA:

In India the norms of corporate governance were introduced by different committees which

are as under,

(1) Rahul Bajaj committee report

(2) Recommendations of Kumar Mangalam Committee Report.

(3) Naresh Chandra Committee Report.

3.3 RAHUL BAJAJ COMMITTEE REPORT ON CORPORATE GOVERNANCE:

Since the second half of the 19th century, most modern industries and services in India have

been structured under the English common law framework of joint-stock limited liability.

Despite this long corporate history, the phrase “corporate governance” remained unknown

until 1993. It came to the force due to a spate of corporate scandals that occurred during

the first flush of economic liberalization. The first was a major securities scam that was

uncovered in April 1992, which involved a large number of banks, and resulted in the stock

market nose-diving for the first time since the advent of reforms in 1991. The second was a

sudden growth of cases where multinational companies started consolidating their

ownership by issuing preferential equity allotments to their controlling group at steep

discounts to their market price. The third scandal involved disappearing companies of 1993-

94. Between July 1993 and September 1994, the stock index shot up by 120%. During this

boom, hundreds of obscure companies made public issues at large share premium,

buttressed by sales pitch of obscure investment banks and misleading prospectuses. The

management of most of these companies siphoned off the funds, and a vast number of

small investors were saddled with illiquid stocks of dud companies. This shattered investor

confidence, and resulted in the virtual destruction of the primary market for the next six

years. Today, more and more listed companies have begun to realize the need for

transparency and good governance to attract foreign as well as domestic capital.

3.4 STRUCTURE OF THE CORPORATE INDIA – A DESCRIPTION

Before describing India’s corporate sector at the end of 20 th century, it is useful to

emphasize the great churning that has been unleashed by less than a decade of economy
liberalization. Nothing highlights these more than two simple comparisons – the fall from

grace of yesterday’s corporate giants, and the rise of the new kinds on the block. Consider

the top 100 companies ranked according to market capitalization as on 1 April 1991. How

have these been treated by the market nine years after liberalization? Very poorly, as the

following statistics indicate:

• Between ranks of the top 10 companies on 1 April 1991 fell by an average of 28 points as

on 28 February 2000.

• The rank of the top 25 companies fell by an average of 47 points.

• For the top 100, the average fall in rank was 77 points.

Simply put, in relative terms, yesterday’s giants have been dwarfed by the forces of change.

What about the new kings of the bourse? When did these firms come into being? That data

is even more revealing, and shows how economic liberalization, competitiveness and

dismantling of controls have reduced entry barriers, and permitted new entrepreneurs to

race to the top of the market capitalization table.

AGENCY COST:

It will take considerably more research before anyone can definitely apportion agency cost

effects between efficiency and expropriation for the Asian corporations. However, the point

to recognize is that poor corporate governance is not only about destroying share-holder

value through managerial inefficiency arising out of the disjunction between share

ownership and corporate control. Efficiently run firms that consistently outperform the

market and earn returns that exceed the opportunity cost of capital can have poor

corporate governance. And this can manifest itself in a steady expropriation of minority
shareholder rights. Indeed, the attitude of minority shareholders in most parts of Asian has

facilitated this process. For most part, they have questioned corporate policies of their

companies, and felt satisfied by their dividends and capital appreciation.

Until the mid-1990s, India had the worst of both types of agency costs. Dysfunctional

economic and trade policies combined with low equity ownership to allow companies to

thrive in uncompetitive ways – which began to have their denouement when the economy

started opening up to international competition. There was a major erosion of corporate

value, measured in terms of economic value added (EVA), which is difference between the

return on capital employed and the opportunity cost of capital. A CII study shows that,

during the four-year period between 1995 and 1998, the top 363 listed Indian companies

ranked by sales lost EVA to the tune of Rs. 564 billion ($13 billion), which amounted to

almost 6% of the aggregate value of sales.

3.5 WINDS OF CHANGE – RECENT CORPORATE GOVERNANCE INITIATIVES

There have been two major corporate governance initiative launched in India since the mid

1990s. The first has been by, the Confederation of Indian Industry (CII), which is India’s

largest industry and business association the second is by the SEBI.

THE CII CODE

More than a year before the onset of the Asian crisis, CII set up a committee to examine

corporate governance issues, and recommend a voluntary code of best practices. The

committee was driven by the conviction that good corporate governance was essential for

Indian companies to access domestic as well as global capital at competitive rates. The first
draft of the code was prepared by April 1997, and the final document (Desirable Corporate

Governance: A Code), was publicly released in April 1998.

DESIRABLE DISCLOSURE

“Listed companies should give data on high and low monthly averages of share prices in a

major stock exchange where the company is listed; greater detail on business segments, up

to 10% of turnover, giving share in sales revenue, review of operations, analysis of markets

and future prospects.” Major Indian stock exchanges should gradually insist upon a

corporate governance compliance certificate, signed by the CEO and the CFO.” If any

company goes to more than one credit rating agency, then it must divulge in the prospectus

and issue document the rating of all the agencies that did such an exercise. These must be

given in a tabular format that shows where the company stands relative to higher and lower

ranking.”

“Companies that default on fixed deposits should not be permitted to accept further

deposits and make inter-corporate loans or investments or declare dividends until the

default is made good.” The CII code is voluntary. Since 1998, CII has been trying induce

companies to disclose much greater information about their boards. Consequently, annual

reports of companies that abide by the code contain chapter on corporate governance,

which discloses.

4. KUMAR MANAGALAM COMMITTEE REPORT

Corporate governance is no longer limited to the halls of academic and is increasingly

finding acceptance for its relevance and underlying importance in the industry and capital

market. Progressive firms in India have voluntarily put in place systems of good corporate
governance. In an age where capital flows world wide, just quickly as information, a

company that does not promote a culture of strong, independent oversight, to risk its very

stability and future health. Studies of firms in India and abroad have shown that markets

and investors take notice of well-managed companies, respond positively to them, and

reward such companies with, with higher valuations. Strong corporate governance is thus

indispensable to resilient and vibrant capital markets and is an important instrument of

investor’s protection. It is the blood that fills the veins of transparent corporate disclosure

and high quality accounting practices. It is the muscle that moves a viable and accessible

financial reporting structure. Another important aspect of corporate governance relates to

issues of insider trading not. It should at allow insider to manipulate their position and take

unfair advantages. To prevent this corporate are expected to disseminate the material price

sensitive information in timely and proper manner. This report points out that the issue of

corporate governance involves besides shareholders, all other stakeholders. The

committee’s recommendations have looked at corporate governance from the point of view

of the stakeholders and in particular that of shareholders and investors. The control and

reporting functions of boards, the roles of the various committees of the board, the role of

management, all assume special significance when viewed from this perspective. At the

heart of committee’s report is the set of recommendations, which distinguish the

responsibilities, and obligations of the boards and the management in instituting the

systems for good C.G. Many of them are mandatory. These recommendations are expected

to be enforced on listed companies for initials disclosures. This enables shareholders to

know, where the companies are in which they have involved. The committee recognized

that India had in place a basic system of corporate governance and that SEBI has already

taken a number of initiatives towards raising the existing standards. The committee also
recognized that the Confederation of Indian Industries (CII) had published a code entitled

“Desirable code of corporate of Governance and was encouraged to note that some of the

forward looking companies have already reviewed their annual report through complied

with the code. Now to protect investors specially shareholders from any malpractices and

injustice the Securities and Exchange Board of India appointed committee on corporate

governance on May 7, 1999 under chairmanship of Shrikumar Managalam Birla, Member of

SEBI Board to promote standard of C.G.

4.1 THE CONSTITUTIONS OF COMMITTEE

The committee has identified the three key constituents of corporate governance as the

share holders, the Board of Directors and the Management. Along with this the committee

has identified major 3 aspects namely accountability, transparency and equality of

treatment for all shareholders. Crucial to good corporate governance are the existence and

enforceability of regulations relating to insider information and insider trading. These

matters are currently being examined over here. The committee had received good

comments from almost all experts’ institutions, chamber of commerce Adrian Cadbury –

Cadbury Committee etc.

4.2 CORPORATE GOVERNANCE OBJECTIVES

Corporate Governance has several claimants – shareholders, suppliers, customers, creditors,

the bankers, employees of company and society. The committee for SEBI keeping view has

prepared primarily the interests of a particular class of stakeholders namely the

shareholders this report on corporate governance. It means enhancement of shareholder

value keeping in view the interests of the other stack holders. Committee has recommended
C.G. as company’s principles rather than just act. The company should treat corporate

governance as way of life rather than code.

APPLICABILITY OF THE RECOMMENDATION

Recommendations are divided into two categories they are Mandatory and Non-Mandatory.

The committee was of the firm view that mandatory compliance of the recommendations at

least in respect of essential the essential would be most appropriate in the Indian context

for the present. The committee felt that some of the recommendations are absolutely

essential for the framework of corporate governance and virtually from its core while others

could be considered desirable. Thus committee has classified recognize into two parts.

APPLICABILITY

The committee is of the opinion that the recommendations should be made applicable to

the listed companies them directors, management, employees and professionals associated

with such companies, in accordance with time table proposed in the schedule given later in

this section. The recommendations will apply to all the listed private and public sector

companies, in accordance with the schedule of implementation. As for listed entitles which

are not companies, but body corporate e.g. private sector banks, financial institutions,

insurance companies etc. Incorporated under statutes, the recommendations will apply to

the extent that they do not violate guidelines issued by prevalent authority.

SCHEDULE OF IMPLEMENTATION

The committee recognises that compliance with the recommendations would involve

restructuring the existing boards of companies. With in financial year 2000-2001, not later

than March 31, 2001 by all entitles, which are included either in-group ‘A’ of the BSE on in
S&P CNX Nifty index as on January 1, 2000. However, to comply with recommendations,

these companies may have to begin the process of implementation as early as possible.

These companies would cover more than 80% of the market capitalization. Within Financial

year 2001-2002 but not later than March 31, 2002 by all the entities which are presently

listed with paid up share capital of Rs. 10 crore and above an net worth of Rs. 25 crore as

more any time in the history of the company. Within financial year 2002-03 but not later

than market 31, 2003 by all the entities which are presently listed with paid up share

capitals of Rs. 3crore and above.

4.3 MANDATORY RECOMMENDATIONS:

BOARD OF DIRECTORS:

An effective corporate governance system is one, which allows the board to perform these

dual functions efficiently. The board of directors of a company thus directs and controls the

management of a company and is accountable to the shareholders. The board directs the

company, by formulating and reviewing company’s policies strategies, major plans of action,

risk policy, annual budgets and business plans, setting performance objectives, monitoring

implementation and corporate performance and over seeing major capital expenditures,

appositions and change in financial control and compliance with applicable law taking into

the account the interests of the stake holders.

COMPOSITION OF THE B.O.D.:

The composition of the Board is as important as it determines the ability of the board to

collectively provide leadership and ensures that no one individual or a group is able to

dominate the board. This has undergone a change and increasingly the boards comprise of
following groups of directors. Promoter, director executive and non-executive directors, are

part of who are independent.

INDEPENDENT DIRECTION:

Independent directions are those directors who apart from receiving director’s

remuneration do not have any other material pecuniary relationship with company. Further,

all pecuniary relationship or transactions of the non executive directors should be disclosed

in the annual report. The committee recommends that the board of a company have an

optimum combination of executive and non-executive directors with not less than fifty

percent of the board comprising the non-executive directors.

In case a company has a non-executive chairman, at least one third of board should

comprise of independent directors and in case a company has an executive chairman at

least half of board should be independent.

NOMINEE DIRECTORS:

These directors are the nominees of the financial as investment institutions to safeguard

their interest it may be present of retired employee of financial institution on outsider. The

committee recommend that institutions should appoint nominees on the boards of

companies only on a selective basis where such appointment is pursuant to a right under

loan agreements as where such appointment in is considered necessary to protect like

interest of the institutions.

CHAIRMAN OF THE BOARD:

The committee recommends that a non-executive chairman should be entitled to maintain a

chairman’s office at the company’s expense and also allowed reimbursement of expenses

incurred in performance of his duties. This will enable him to discharge the responsibilities

effectively.

AUDIT COMMITTEE (NON MANDATORY):

The committee is of the view that the need for having an audit committee grows from the

recognition of the audit committees’ position in the larger mosaic of governance process.

The audit committee’s job is one of oversight and monitoring and carrying out this job it

relies on similar financial management and outside auditors. The committee believes that

the progressive standards of governance applicable to the full board should also be

applicable to the audit committee.

The committee therefore recommends that the board of a company should set up a

qualified and independent audit committee. The committee states that audit committee

should have minimum three members, all being non-executive directors, with the majority

being independent and with at least one director having financial and accounting

knowledge.

FREQUENCY OF MEETING AND QUORUM (MANDATORY RECOMMENDATION):

The committee recommends that to begun with the audit committee should meet at least

thrice a year. One meeting must be held before finalization of annual accounts and one

necessarily every six months. The quorum should be either two members or one third of
members of audit committee, whichever is higher and there should be a minimum of two

independent directors.

POWERS OF AUDIT COMMITTEE (MANDATORY):

(1) To investigate any activity within its terms of reference.

(2) To seek information from any employee.

(3) To obtain outside legal on other professional advice.

(4) To secure attendance of outsiders with relevant expertise, if it considers necessary.

FUNCTIONS OF AUDIT COMMITTEE (MANDATORY):

(1) To ensure that the financial statement is correct, sufficient and creditable.

(2) Recommending the appointment and removal of external audit.

(3) Reviewing with management annual financial statement before submission to board

related to changes in accounting policies and practices.

(a) Major accounting entries.

(b) Qualifications in draft audit report.

(c) Significant adjustments arising out of audit.

(d) Compliance with accounting standards.

(e) Compliance with stock exchange and legal requirement concerning financial statements.

(f) Any transaction that may have potential conflict with the interest of company at large.

(4) Reviewing with the management about adequacy of control.

(5) Discuss with internal auditors into the matter suspecting fraud on irregularity.

(6) Discuss with external auditors before the audit commences and also post-audit

discussion to ascertain any area of concern.

REMUNERATION COMMITTEE (MANDATORY):

The committee is of the view that a company must have a creditable and transparent policy

in determining and accounting for the remuneration of the directors. For this purpose the

committee recommends that the board should set up a remuneration committee to

determine on their behalf and on behalf of the shareholders with agreed terms of

references. The Remuneration Committee should comprise of at least three directors, all of

them should be non-executive directors, the chairman being an independent one. The

chairman of Remuneration Committee should present at AGM. It is important for the

shareholders to be informed of the remuneration of the directors of the company, which is

mandatory.

(3) NARESH CHANDRA COMMITTEE REPORT ON CORPORATE GOVERNANCE

The department of company affairs also constituted a high level committee under the

chairmanship of Naresh Chandra, a former cabinet secretary to recommend measures for

improvements in corporate audit and governance. The committee submitted its report on

various aspects concerning corporate governance such as role, remuneration, and training

etc. Of independent directors, audit committee, the auditors and then relationship with the
company and how their roles can be regulated as improved. The committee stingily believes

that “a good accounting system is a strong indication of the management commitment to

governance. Good accounting means that it should ensure optimum disclosure and

transparency, should be reliable and credible and should have comparability. According to

the committee, the statutory auditor in a company is the “lead actor” in disclosure front and

this has been amply recognized sections 209 to 223 of the companies act. The chief aspects

concerning the auditors functioning as per the act are:

Auditors are fiduciaries of the shareholders not of the management as they are

appointed as the shareholders appoint them.

Auditor’s independence is guaranteed as rules for removing on replacing an auditor

as more stringent than for reappointment.

The statutory auditor of a company can, at all times, have the right of access to all

books of accounts and vouchers of a company and his repeat can be quite exhaustive

to specify whether, The auditor could obtain from management all information and

explanations that were necessary for the purpose of audit.

Proper books of accounts have been kept by the company

Brained offices have been audited by him

Company’s accounts conform to accounting standards set by the institute of

chartered Accountants of India.

Some Mandatory functions are,

The adequacy of internal control commensurate to the size of the company and its

business.
 The adequacy of records maintained on fixed assets and inventories and whether

any fixed assets were re-valued during the year.

Loans and advances that were given by the company, and whether the parties

concerned were regular in repaying the principal and interest.

Loans and advances taken by the company and whether these were at terms in

judicial to the interest of the company and also whether these were being property

repaid according to conducted schedules.

Transactions including loans and advances, with related parties as defined by section

301 of the companies act.

Fixed deposits accepted by the company from the public and if so, whether these

conform to the provisions laid down by section 58A of Co.’s Act.

Regularity of depositing of provident fund dues and whether the employees’ State

Insurance Act 1948, was applicable to the company.

No personal expenses of directors and employees were charged to the profit & loss

Act.

In the case of any manufacturing company, whether the management has confirmed

to the manufacturing and other companies order 1988.

GUIDELINES OF COMMITTEE TO AUDITORS:

(i) For the public to have confidence in the quality of audit, it is essential that auditors

showed always be and be seen to be independent of the company, which includes integrity,

professional ethics and objectivity.

(ii) Before taking any work auditor must consider that there should not be any threat to his

independence. And if it present he should adopt risk aversion virtue.

(iii) Where such treats exist the auditor should either desist from the task or, at the very

least, but in place safeguards that criminate them to reduce the threats to clearly

insignificant levels.

For the auditor is unable to fully implement credible and adequate safeguards then he must

not do the work.

ASPECTS OF CORPORATE GOVERNANCE

CORPORATE GOVERNANCE AND ETHICS:

Ethics is normative science that deals with conduct of human beings living in society, so as

to judge what is right and what is wrong on in the terms of good or bad. Ethics builds certain

norms and standards against which comparison can be made and conclusions can be

derived. Thus ethics deals with abstract and subjective issues. Business stands in society and

society is guided by norms of it. Ethics in business is related to conduct of business. Society

cannot remain silent in relation to “BUSINESS ETHICS.”

Business conduct is generally or mostly guided by

a. Mission and objectives of Organization.

b. Collective aspirations and judgment of manager about means and ends of business.

c. Expectations of shareholders.

Out these factors expectations of shareholders play an important role. This can be described

as base far corporate governance.

  Corporate governance puts more emphasis on ethical activities. Especially in the

recent years it has been found that most reputed firms have been found to

undertake unethical activities. These activities are growing debate for business firms.

A reputed firm may be found to follow unethical practices like,

(a) Non payment of taxes, fees dues to government.

(b) MIS representation of facts about products and services.

(c) Default in repayment of coins, deposits etc.

(d) Apathetic attitude towards environment.

 Concealment of vital information about organization, which may be expected in

normal course of made, and the absence of such information will change the

decision of decision makers.

Ethics leads to grow debates on the following issues:

 Responsibility of members of board of directors

 & Disclosure forms relating to annual reports, as companies do not publish some

vital information like environmental pollution or steps in the direction of appropriate

technology.

Every business society has its accepted behaviours if someone deviates from it, it is

considered to be unethical. Business communication showed gets its accepted behaviour

written down and codified. The corporate should periodically revise its rooms and impinge on

its members to adhere to these.

NOW HOW TO JUDGE ETHICS?

PRINCIPLES FOR STAKE HOLDERS:

This means how bus organization should deal with different stakeholders: Like,.

(1) Principles / Ethics towards employees:

 Provide such wages and compensation that improve worker’s living conditions.

 Provide such work environment that maintains health of employees.

 Try to be honest with employees during communicating them.

 Try to consider idea, suggestions & complaints of employees.

 Protect employees.

(2) Principles / Ethics towards investors:

 Apply professional and diligent management for fair management.

 Disclosure of all information

 Conserve / Prefect and increase investor’s assets.

 Respect suggestions & complaints of them.

(3) Principles / Ethics towards Suppliers:

 To be fare in pricing.

 Pay in time accordance with terms.

 Prefer supplier who gives preference to human dignity.

 Share information.

 Maintain relationship with supplies.

(4) Principles / Ethics towards Communities:

  Respect human rights.

 Support govt. & public policies.

 Promote development in society.

 Respect culture.

 Maximize charity if possible.

(5) Principles / Ethics towards Customers:

 Provide highest quality product.

 Treat customer fairly.

 Provide reasonable price.

 Provide all knowledge to customers related to product.

Company should follow all these ethics so that it can reduce risk of not following ethics.

CORPORATE GOVERNANCE & FINANCIAL ACCOUNTIN

The basic objective of accounting in corporate management in recent times has come to be

understood as “to put in place a sound system of financial reporting.” That would

necessarily have to include maintenance of accounts and preparation of financial

statements on the basis of sound accounting principles, which would ultimately leads to

transparent reporting. The centrality of financial reporting in establishing the creditability of

management in corporate affirms is well brought out by the Institute of chartered

Accountants of India in its “Framework for the preparation and presentation of financial

statements” in following words. “Financial statements also show the results of the

stewardship of management or the accountability of management for the resources

entrusted to it. Those users who wish to assets the stewardship an accountability of
management do so in order that they may make economic decisions, the decision may

include, for e.g., whether to hold or sell their investment in the enterprise or whether to

reappoint or replace the management. Now it has been realized by most of the

management to keep proper system of accounting to maintain effective control.

Maintenance of proper accounting system has two objectives viz – safeguarding of assets

including prevention and detection of fraud and ensuring that the periodical financial

reports required to be published under various regulation and statues are reliable. The

emphasis on reliability of financial reporting in present day doesn’t mean only figures stated

in financial reports but would also include standardization of the accounting transactions

and flounce of standards pronounced by professional bodies.

FINANCIAL ACCOUNTING & GOVERNANCE:

Since 80’s & 90’s the world has passed through movement of globalization & liberalization.

This has led many companies to follow principles related to accountancy. The International

Accounting Standards Committee (converted as International Accounting Standard Board

with effect from 1st April 2001) as the apex body of professional institutes of accountants of

various countries has issued named as Accounting Standards on various issues concerning

accounting. In the Indian scenario in the matter of evolution and adoption of Accounting

Standards, of late is rapid. Institute of Chartered Accountants of India (ICAI) had formed

Accounting Standards Board way back in 1974; these were not mandated on its members

while discharging the attest function till the late 80’s and early 90’s. Even imposed only on

the members and not on management. The various reports on corporate governance have

quickened the process of pronouncement of newer Accounting Standards by the Institute of

chartered Accountants of India. The present era of corporate of Governance in global

environment is creating a situation where the individual countries are evolving Accounting

Standards on many issues of interest of an accountant and these are being synchronized,

and the system is moving towards an evolution of global Accounting Standards. The period

when the whole world will be adopting a single global standard on all accounting issues is

not far off.

CHALLENGES FOR DEVELOPING COUNTRIES

The most important that corporate governance is recently origin concept and has been

developed since few years. The question may arise then that if corporate world wants to

have benefits from this concept, they have to be aware about the challenges that is put

forth to this concept. No doubt corporate governance can function to strengthen public

policy but important thing is that how corporate governance. Supports national

competitiveness, how it can encourage national and international investment, how it can

support economics growth, how it can generate employment and help to overcome poverty

and social exclusion corporate governance. is not only a matter of corporate sector but also

of whole economy including public sector, private sector and civil society.

Thus the main and important aspect related to corporate governance is that,

“We can not achieve good governance if public governance is deficient, if political

leadership and institutions are distrusted if the law is outdated and legal administration

takes years or even decades to deliver justice.”

We cannot say that corporate governance is just an end but it is an instrument to achieve an

end. If corporate governance is followed well then other benefits will automatically follow it.

Thus corporate governance should be used as development policy instrument.

There are different challenges like,

(1) Different Perceptions:

Corporate governance is looked as best concept from the point of view of investors. They

always support corporate governance because they are enthusiastic about corporate

governance and want more of it especially after recent scandals. But company’s directors

are least interested in publishing their accounts because their preoccupations are to survive

in a viciously competitive global market, to maximize profit, and to be a decent corporate

citizen and not to bother with contributions to public policy.

(2) Dilute the Principle of Accountability:

A great debate was made in late 1990’s about whether corporate governance is applicable

to state enterprise and family owned companies. There was a strong voice that corporate

governance is applicable to only publicly listed companies where there is principal agent

relationship. But corporate governance is for increasing accountability and making

company’s owners “do-gooder” corporate governance is for increasing company’s growth

through transparency but this is generally late pronounced.

(3) Less Punitive Principles:

When any one say for corporation governance whether developing countries have same

challenges as that of developed countries, then one aspect comes into mind that there is

lack of punitive measures initiated by government. Which are not present actually.

(4) Objectives of corporate governance are themselves not clear:

Developing countries should apply corporate governance not only for better governance. If

corporate governance. is applied in effective way then it can solve many problems. But

owners or players of corporate world are not applying exact principles and objectives for

development of stakeholders. Corporate governance can be linked to a number of

development objectives and assigned development targets.

(5) Lack of training to the directors:

Sometimes Directors of a company are themselves not clear about what they are supposed

to do under application of corporate governance. The mass of directors, in sufficient

numbers to make difference to the performance of the economy should be trained enough.

The training will lead to sufficient applicability of corporate governance.

(6) Absence of strategic Measures:

Corporate governance needs strategic application. Which means all the elements are

needed to be programmed first and identification of key elements for successful

implementation. But, unfortunately this measure does it present in developing countries.

SWOT analysis is needed in every sector of economy. Benchmarking, TQM, and ISO can help

a lot in changing & transferring concept of business.

(7) Lack of Professionalization:

Developing countries like India do not have professional touch and most of the businesses

are family concerned so they lack professional touch in their management While corporate

governance needs solid professional base which will generate ideas and strategy both to

guide the business. It needs more professional standards.

PROBLEMS IN EFFECTIVE GOVERNANCE

Bad governance is opposite of good governance. Simply bad governance is, obviously,

harmful for nation, society, economy and most importantly for company. If a company fails

to develop standard forms and principles at work place than it may results into:

Devaluation

Crime

Manipulation

Due to bad governance many company had faced accelerating scandals and problems.

Shareholders will not have complete faith in such industries which do not employee

standardize norms and prentices.

The companies like Enron and world com had faced such accounting scandals & even they,

believe and started giving importance to “CORPORATE GOVERNANCE.”